The piece made some claims I was rather skeptical of since they appeared to be in tension: (1) that value underperformance has been sustained and possibly may exist well into the future depending on economic data (2) that smart beta had overcrowded value.

Shouldn't some corollary of Sharpe's theorem hold here, making this combination impossible?

"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

The piece made some claims I was rather skeptical of since they appeared to be in tension: (1) that value underperformance has been sustained and possibly may exist well into the future depending on economic data (2) that smart beta had overcrowded value.

Shouldn't some corollary of Sharpe's theorem hold here, making this combination impossible?

Business Week had the infamous "Death of Equities" cover on its magazine and now Bloomberg owns Business Week. I had joked about the "Death of Value Investing" and that such an article would be a signal of an impending bull market in Value stocks. No joke, the article is here.

I googled "Business Week Death of Equities" and up popped an article written by our own Barry Ritholz on August 13, 1979. It was early, the bull market didn't start until 1984, so Barry was five
years early. Sort of like Alan Greenspan's "Irrational Exuberance" speech given on December 5, 1996 warning of too much exuberance in the US Stock Market. The bull market went on for 4 years after that. The subtitle to Ritholz' article was "How Inflation is Destroying the Stock Market."

My off the wall guess is that Value will roar back with a lengthy bull market in four or five years. I thought it started in 2016, which was a great value year, but in 2017, growth is winning again. Oh well. This is why I don't write a market timing newsletter.

Triceratop,
Haven't seen the article. I can only give you my cumulative opinion from the lay person's reading I have done. To me the risk story for value makes complete sense: higher cost of capital, more leveraged, distressed, more variable earnings. When I started my interest in value I thought it was 90%+ a risk story. As I've continued to learn, it appears to me that the behavioral component is either larger than I initially gave it credit for, or at least more solid. I've really become more convinced that human behavior doesn't change and that the limits to arbitrage on the short side are substantial. My conviction is strengthened by having very intuitive plausible risk and behavioral stories.

nedsaid wrote:Sort of like Alan Greenspan's "Irrational Exuberance" speech given on December 5, 1996 warning of too much exuberance in the US Stock Market. The bull market went on for 4 years after that.

I'm not sure it was warning about US stocks at all. It talked about the Japanese experience, then mentioned 1987, but nothing on 1996 valuations:

Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy.

Journalists may have taken it out of context, repeating "irrational exuberance has unduly escalated asset values". I figure that Robert Shiller's book using the phrase may have created the myth of AG "warning" about US stock valuations in the speech. Even the Wikipedia page says "Greenspan's comment was well remembered, although few heeded the warning." It was not a warning at all, it was simply asking abstract questions.

Random Walker wrote:
Haven't seen the article. I can only give you my cumulative opinion from the lay person's reading I have done. To me the risk story for value makes complete sense: higher cost of capital, more leveraged, distressed, more variable earnings. When I started my interest in value I thought it was 90%+ a risk story. As I've continued to learn, it appears to me that the behavioral component is either larger than I initially gave it credit for, or at least more solid. I've really become more convinced that human behavior doesn't change and that the limits to arbitrage on the short side are substantial. My conviction is strengthened by having very intuitive plausible risk and behavioral stories.

There are both behavioral and risk based explanations that explain the value premium. Intuitively it seems totally plausible. As much as I question on this forum some assumptions of factor strategies, I do believe that the value factor is real and that at some unpredictable point in the future SCV is likely to shine again. I do invest modestly in SCV in US markets and I am much more tilted in that direct in INTL markets which I believe to be less efficient. I also believe that, unlike some other factors, value, due to its persistent underperformance for more than a decade, is currently priced to deliver at some point in the future. When (and even if) that starts is a serious question. Clearly a low growth, low inflation, stagnant productivity environment like the one we have been in for a decade is not the optimal macroeconomic environment for value to shine. If economic growth becomes robust and inflation comes out of the doldrums the value tide will likely turn.

There is, however, a concern to the above scenario that I have in spite of the fact that I invest a portion of my assets in value. It seems to me that equity markets are a lot like quantum mechanics where the Heisenberg Uncertainty Principle rules. That principle states that there is a fundamental rock solid limit to predictability of what is going to happen in the future even given all current knowledge and even with the smartest guys in the world using all that knowledge to make their predictions. The future is inherently unpredictable with accuracy and the best we can do is assign probabilities to different outcomes. I believe equity markets seem to like quantum theory and also seem to enjoy humbling the predications of the brightest and best informed among us. So at heart, I believe it is probable that for those with iron stomachs and the patience of Job, value will in the end pay off. When (and if) it will pay off and by how much given the ever increasing popularity of factor investing approaches is not predictable IMO. Given that an investor's time frame is not infinite and that his/her emotional stability in bear markets may not be rock solid, it may be entirely rational for many investors to abandon the tracking error regret, increasing complexity and cost, and hang with beta, TSM. No one can predict with certainty, given varying investor's time frames, which approach in the end will wind up outperforming.

Random Walker wrote:
Haven't seen the article. I can only give you my cumulative opinion from the lay person's reading I have done. To me the risk story for value makes complete sense: higher cost of capital, more leveraged, distressed, more variable earnings. When I started my interest in value I thought it was 90%+ a risk story. As I've continued to learn, it appears to me that the behavioral component is either larger than I initially gave it credit for, or at least more solid. I've really become more convinced that human behavior doesn't change and that the limits to arbitrage on the short side are substantial. My conviction is strengthened by having very intuitive plausible risk and behavioral stories.

There are both behavioral and risk based explanations that explain the value premium. Intuitively it seems totally plausible. As much as I question on this forum some assumptions of factor strategies, I do believe that the value factor is real and that at some unpredictable point in the future SCV is likely to shine again. I do invest modestly in SCV in US markets and I am much more tilted in that direct in INTL markets which I believe to be less efficient. I also believe that, unlike some other factors, value, due to its persistent underperformance for more than a decade, is currently priced to deliver at some point in the future. When (and even if) that starts is a serious question. Clearly a low growth, low inflation, stagnant productivity environment like the one we have been in for a decade is not the optimal macroeconomic environment for value to shine. If economic growth becomes robust and inflation comes out of the doldrums the value tide will likely turn.

There is, however, a concern to the above scenario that I have in spite of the fact that I invest a portion of my assets in value. It seems to me that equity markets are a lot like quantum mechanics where the Heisenberg Uncertainty Principle rules. That principle states that there is a fundamental rock solid limit to predictability of what is going to happen in the future even given all current knowledge and even with the smartest guys in the world using all that knowledge to make their predictions. The future is inherently unpredictable with accuracy and the best we can do is assign probabilities to different outcomes. I believe equity markets seem to like quantum theory and also seem to enjoy humbling the predications of the brightest and best informed among us. So at heart, I believe it is probable that for those with iron stomachs and the patience of Job, value will in the end pay off. When (and if) it will pay off and by how much given the ever increasing popularity of factor investing approaches is not predictable IMO. Given that an investor's time frame is not infinite and that his/her emotional stability in bear markets may not be rock solid, it may be entirely rational for many investors to abandon the tracking error regret, increasing complexity and cost, and hang with beta, TSM. No one can predict with certainty, given varying investor's time frames, which approach in the end will wind up outperforming.

Garland Whizzer

I'm not sure I follow. I agree with much of what both of you have said, but what I do not see is how it relates to my question about that article. I am familiar with the risk/behavorial arguments, but mine was much more "structural". That is, how it is possible for value to be "crowded" by smart beta products and simultaneously be underperforming (and expected to possibly continue to do so). Is it their contention that value would be doing even worse if it weren't for smart beta and value indexing?

"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

BogleAlltheWay wrote:Does this mean that it is better to tilt toward value?

I have been reading the Boglehead's suggested readings and have seen conflicting opinions on tilting toward value.

"Lord make me chaste. But not yet" - St. Augustine

You can tilt 20% of your portfolio towards the value premium. On the odds that it has historically shown up. However that does not mean it will in the future:

1. there are a lot of funds chasing "the value anomaly" and history says these things get priced out of the market

2. see Jeremy Grantham at GMO who publishes a monthly letter to investor, as to why the value premium has failed to play out for them due to structural changes in corporate profitability

#2 and Nedsaid's article really highlights the most dangerous phrase in human investing "this time it's different" to me.

A few things to consider: Value is like the odd duck in the pond compared to the other non-3F factors that have been isolated.

Quality/Profitability - inherently leads to growthiness (the good side of growth).

Momentum - the opposite of value most of the time (explicitly so for AQR's HML-Devil). VERY growthy

Low volatility- traditionally a value metric but now painfully high valuation.

If you talk to Arnott, market is inherently Growth by price. FF would disagree.

Size I'm least sure about on the continuum

Value also has brutal tracking error problems in the good years. In light of that, look at virtually all of the multifactor funds that have come out recently. With the exception of AQR and the "screeners" (DFA and PIMCO RAE RAFI+quality and momentum screens), most of them have modest tilts at best and often go negative on value. These funds are a microcosm of much bigger trends for the institutional investors.

For those who find the value factor iffy, I guess it makes sense to be a TSMer since the value factor may well be the factor that is on most solid footing. But then the investor is putting all his eggs in one basket, market beta. Another way to approach the issue though is to instead diversify across all the factors. When any one factor can have long periods of underperformance, to me makes most sense to diversify across factors: market beta, size, value, Momentum, profitability.

I have to compare the question, "Is the value premium behavioral or risk?" to asking "Will the Yankees or the Mets win the World Series this year?"

The obvious response to the second question is, "Uh, there *are* other teams." And that is my response to the former as well--there are other options.

When the first question is asked, the assumption is that either: a) The market knew beforehand that value would outperform but because of "risk" this knowledge was not accounted for in the price ahead of time; b) The market *should* have known beforehand that value would outperform but because investors are in general dumb, this wasn't accounted for in prices ahead of time.

It is of course entirely possible that the market did not and should not have known that value would outperform during most of the 20th century. For example, it is generally accepted that inflation is better for value stocks than growth stocks as value stocks tend to have more debt on their balance sheets. In the post-depression era up through 2008, inflation risk was mostly on the high side over the decades. Should the market have known this?

Post 2008, inflation risk has been on the low side--2% has become an aspirational ceiling as opposed to a number to try to get it down to. Will that continue? Is there an obvious answer to that question that all investors do and should know? I don't think so, but perhaps others disagree. If inflation averages 1% for the next 20 years, that favors growth. If it does, will the existence of a "growth premium" come to be accepted in academia?

Inflation is only one factor in pricing of growth vs. value, but you can see where the assumption that what happened was or should have been known ahead of time is problematic.

Jumping to the question of whether the return premium was "risk" or "behavioral" while ignoring all other options is really just a way to make a past pattern seem more guaranteed to repeat than it actually is.

triceratop wrote:...how it is possible for value to be "crowded" by smart beta products and simultaneously be underperforming (and expected to possibly continue to do so). Is it their contention that value would be doing even worse if it weren't for smart beta and value indexing?

I think you've slightly misunderstood the claim from Goldman Sachs. Which is understandable, since all we have to go on are media summaries of their report; I can't seem to find the actual report online anywhere. Maybe it is only for clients.

The Goldman Sachs team is saying that

1. In the medium- and recent-past, value has underperformed. That has been due (they say) to the current economic cycle, which has played out over many years.
2. In the future, the value premium will continue to exist but it may be smaller due to the larger number of people investing in it via smart beta products.

the increased use of passive investment tools combined with a widespread adoption of “smart beta” strategies suggest more elusive future (ed: emphasis added) returns to investors seeking value and other factor premia

The claims are happening over two different time frames: the macroeconomic effects happened from T-15 to today; the factor crowding happened from T-2 to future. (Numbers are made up but probably somewhat accurate.)

That said, I agree with you that the claim is a bit dubious. Sure, factor investing is relatively new. But value investing sure isn't! Even Vanguard -- who aren't exactly on the cutting edge when it comes to introducing new funds -- has had value funds for decades; since 1998 and now with $26 billion in assets in their small-cap value fund alone; that's not counting their US Value, Selected Value, and Explorer Value, and Capital Value funds. If they were talking about, say, the Quality factor or Profitability factor, I'd agree with them. Those didn't have any real investment 24 months ago and now there's a half dozen funds at least using it in some kind of screen.

But value? It's had billions of dollars chasing it for a long time in very easy to invest in vehicles. Sure, maybe there's a few extra billion chasing value in "multi-factor" funds but....I'm dubious that that will be the straw that broke the value camel's back.

I think that the risk explaination is a lot more powerful than the behavioral one, as behaviors seem more likely to change than risks.

It does seem reasonable that the equity market is broken down into higher risk and return segments and lower risk and return segments.

Bond markets are broken into such segments. Almost no one doubts that short term treasuries have lower risk and return than long term corprates over the long run.

The issue with "smart beta" comes with the fact that some investors do not truly understand the risks they are taking. The efficent market hypothesis says you can't get a free lunch - factor tilts (in my opinion) will likely not get one an enormously better risk-adjusted return over the long run.

Factor tilting can get better returns - but only for more risk. The risk levels are incredible - small-value, especially when done as some do, involves investment in the smallest and most fiscally unsound of companies. You are taking more risk than the stock market - and the stock market is is already risky.

It may be OK for one to tilt 5-20 percent of a portfolio toward small and value... but only for those who truly understand the risks and are able to stay the course for many decades. Those who are unprepared for the risks of smart beta many loose dearly when the risks show up. A strategy of compensating for the added stock risk by holding more bonds may be acceptable (though the Swedroe "Black Swan" portfolio likely takes this too far). Also, due to lengthy cycles of underperformance and overperformance, the factor-tilting investor needs to be prepared to stick with their tilts for at least 30-40 years. In my opinion, this investment has one of the longest time horizons of any.

My belief the market, various market sectors, value stocks, growth stocks, small cap stocks, mid cap stocks and large cap stocks from time to time will be become overpriced or underpriced. The market will eventually self correct over time, sometimes over correcting or swinging the other way. There is no way one can predict the future of this behavior. I am not willing to place my bets on this game.

Last edited by 2pedals on Fri Jun 09, 2017 10:57 pm, edited 1 time in total.

(I'm picking just the most relevant piece out here to respond to, but in truth I am responding to your entire post)

AlohaJoe wrote:2. In the future, the value premium will continue to exist but it may be smaller due to the larger number of people investing in it via smart beta products.

Right, and that is the part of the logical chain that I fail to follow. You could similarly claim that equity returns will be lower in the future because of indexers, but that doesn't make sense because we know that it is valuations and earnings growth that dictate returns, and indexers receive the market return.

The same should be true for Value w.r.t. indexing. If you hold value currently the only thing that matters is its valuation and future returns. If the Goldman argument is value would have underperformed more except for smart beta I would understand; but that does not appear to be what they are claiming because they say value has been hammered and may be undervalued.

"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

triceratop wrote:(I'm picking just the most relevant piece out here to respond to, but in truth I am responding to your entire post)

AlohaJoe wrote:2. In the future, the value premium will continue to exist but it may be smaller due to the larger number of people investing in it via smart beta products.

Right, and that is the part of the logical chain that I fail to follow. You could similarly claim that equity returns will be lower in the future because of indexers, but that doesn't make sense because we know that it is valuations and earnings growth that dictate returns, and indexers receive the market return.

The same should be true for Value w.r.t. indexing. If you hold value currently the only thing that matters is its valuation and future returns. If the Goldman argument is value would have underperformed more except for smart beta I would understand; but that does not appear to be what they are claiming because they say value has been hammered and may be undervalued.

It makes no sense. If value's been underperforming, it'll be cheap now.

If it booms in the future, anyone investing now will benefit by the rise.

Investing in value after it booms (and is relatively expensive) doesn't particularly worry me either. Sure you won't get the same returns as if you had bought value when it's cheap, but by definition you are still buying the least expensive stocks.

Other factors - such a low volatility- worry me more about it being a crowded trade.

david1082b wrote:I'm not sure it was warning about US stocks at all. It talked about the Japanese experience, then mentioned 1987, but nothing on 1996 valuations:

Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy.

Does anyone have any insights on what DFA is saying about this topic as well. They have been a big proponent of value premium being there.

Its very confusing on what to do. If I look at my personal history in the market I can vivdly remember the last time growth had such a big lead over value was in the run-up to 2000 and we know what happened. Are we setting up to again a big swing towards value and international stocks or has the premium really gone away.

stlutz wrote:On the question of whether there is a value premium, let's update the since inception number of the various VG funds:

large cap since 1992:
growth: 9.42%
value: 9.43%

Midcap since 2006:
growth: 8.63%
value 8.72%

Smallcap since 1998:
growth: 8.35%
value: 8.60%

A win by value in all 3 cases, but are these differences large enough to be sure you're realizing a "value premium"?

look at the history of VIVAX vs VIGRX... theyre identical. i think that goes back to the early 90s.

to that effect, compare NAESX (small blend) to VFINX (s/p 500), going back to 1987 when NAESX became an index fund. identical returns.

I think "factor crowding" and just the fact that the big boys (ie institutional investors, hedge funds) aren't going to let any factor "premium" exist for public consumption explains why these factors have not been obtainable for the common investor. DFA came about in the early 90s, great timing, they've had great results, however if you go back just a few years farther you can see that there hasn't been any premium... Now if you go back even farther to 1928 then the data is strong HOWEVER there weren't small cap index funds before 1987 and certainly the factor premiums were not widely known.

I have come to the conclusion that if the average investor thinks he/she can simply invest in VBR instead of VTI and make more money, he/she is likely to be disappointed. It simply cannot be that easy.

privatefarmer wrote:
I have come to the conclusion that if the average investor thinks he/she can simply invest in VBR instead of VTI and make more money, he/she is likely to be disappointed. It simply cannot be that easy.

Looking at the portfolio growth chart in the time frame from 2005 to end of May 2017, VBR (Vanguard Small-Cap Value ETF) looks to have given the opportunity for slightly more lucrative rebalancing at times, say if one uses rebalancing percentage trigger points (think this would require more continuous watching than I would be willing to do). If just letting it ride through that time period, it's very close. Even after the decent small cap run up November through February, VBR is back down close to VTI (Vanguard Total Stock Market ETF) again.

privatefarmer wrote:
I have come to the conclusion that if the average investor thinks he/she can simply invest in VBR instead of VTI and make more money, he/she is likely to be disappointed. It simply cannot be that easy.

Looking at the portfolio growth chart in the time frame from 2005 to end of May 2017, VBR (Vanguard Small-Cap Value ETF) looks to have given the opportunity for slightly more lucrative rebalancing at times, say if one uses rebalancing percentage trigger points (think this would require more continuous watching than I would be willing to do). If just letting it ride through that time period, it's very close. Even after the decent small cap run up November through February, VBR is back down close to VTI (Vanguard Total Stock Market ETF) again.

Therefore, it's not really that risky to tilt to value. Or is it? It isn't. This is akin to equities vs. bonds. One can usually be pretty equity heavy for timeframes >10 years. Even if bonds outperform over the timeframe it isn't going to be by much. The chance of equities outperforming bonds by several percentage points is much greater.

Same goes for value vs. TSM. TSM may outperform over 15 years but if it does it likely won't be by much. Hence, you will not lose the farm with a full value strategy. The chances of good value strategies of outperforming by a percentage point or two are much greater IMO.

It was stated in the original article that you could use SCV in combination with more bonds versus TSM & less bonds to reach a given objective. SInce the article has been published, it has not been true despite being true for years before publication. I know this is only 5 years of data but how long you would have to wait for this to work out if at all is uncertain. There is a case it will be never as inflows into value index funds may have arbed away the value premium. We do not know. From this data, it appears that introducing SCV into a portfolio is adding timing risk of factor performance versus just using TSM funds & in theory you should be compensated for this risk but over this historic period you have not been. IMO the more data I see the more I am convinced of John Bogle's view that value & growth will oscillate back & forth with no discernible trend. If that is the case then all tilting is doing is market timing.

grap0013 wrote:
Therefore, it's not really that risky to tilt to value. Or is it? It isn't. This is akin to equities vs. bonds. One can usually be pretty equity heavy for timeframes >10 years. Even if bonds outperform over the timeframe it isn't going to be by much. The chance of equities outperforming bonds by several percentage points is much greater.

Same goes for value vs. TSM. TSM may outperform over 15 years but if it does it likely won't be by much. Hence, you will not lose the farm with a full value strategy. The chances of good value strategies of outperforming by a percentage point or two are much greater IMO.

Equities can outperform or underperform bonds by 10's of percentage points. Value can outperform or underperform TSM by percentage points.

It is very difficult to say whether the value premium has disappeared or whether it is in a temporary downturn. It is always difficult to say anything meaningful about short term trends in phenomena that fluctuate over decades.

It was stated in the original article that you could use SCV in combination with more bonds versus TSM & less bonds to reach a given objective. SInce the article has been published, it has not been true despite being true for years before publication. I know this is only 5 years of data but how long you would have to wait for this to work out if at all is uncertain. There is a case it will be never as inflows into value index funds may have arbed away the value premium. We do not know. From this data, it appears that introducing SCV into a portfolio is adding timing risk of factor performance versus just using TSM funds & in theory you should be compensated for this risk but over this historic period you have not been. IMO the more data I see the more I am convinced of John Bogle's view that value & growth will oscillate back & forth with no discernible trend. If that is the case then all tilting is doing is market timing.

Packer

You cannot except SCV to outperform every 5 year period. That's not the intention of the strategy. More so, you get solid returns with the Larry Portfolio 30:70 with some serious left tail hedging. Over longer time periods I do expect a 30:70 tilted to get similar returns of a higher equity strategy that only has beta: https://www.portfoliovisualizer.com/bac ... alBond3=60

I like to invest in dominate stocks/companies that throw
off dividends that are extremely hard to compete with (Think Coke Cola).
In my mind do I want to invest in a battleship or a little speed boat.
I think their are millions of people who think as I do & I don't see
the "Persistence Of The Value Premium" going away in my life time.

I was talking with my grandma the other day & telling her I invested in
large blue chip stocks like (Coke, J & J, Boeing. etc) & her response was
those companies are going to keep chugging along no matter what happens.
Keep doing what your doing...& be consistent all along your journey!

snarlyjack wrote:I'm a value investor. But a large cap value investor.

I like to invest in dominate stocks/companies that throw
off dividends that are extremely hard to compete with (Think Coke Cola).
In my mind do I want to invest in a battleship or a little speed boat.
I think their are millions of people who think as I do & I don't see
the "Persistence Of The Value Premium" going away in my life time.

I was talking with my grandma the other day & telling her I invested in
large blue chip stocks like (Coke, J & J, Boeing. etc) & her response was
those companies are going to keep chugging along no matter what happens.
Keep doing what your doing...& be consistent all along your journey!

You do know that when a stock distributes an eg 2% dividend the share price also drops by 2% right?

eg share price is $100 per share, with 2% dividend it drops to $98. You still have $98 + $2 = $100. No actual monetary gain. Plus you have a taxable event.

I'm the antithesis to your investing style. I do not own a single US large cap stock directly or in the form of a mutual fund or ETF. You pay more for the perceived safety. Less upside too.

When my Mom died & left me with quite a bit of life insurance
proceeds (she & I talked about this before her death). She made
me promise to never spend the principal but I could use the
dividends if needed. Since I'm very young (age 100 - age 23 = 77 years)
my hold time is... my forever. My investment strategy has been (1) dividends
(if needed) (2) relative safety over the very long term (3) growth of principal.

After much research the Vanguard High Dividend Index Fund compares very
favorably with the TSM & S & P 500 funds. I specifically target dividends (if needed)
& growth/safety of the fund. Big Blue Chip stocks (in my case) work out perfectly.
It just happens to be a "value tilt" to large companies/blue chips that pay dividends.

I realize that everyone is different in their needs & wants. I was just saying
in my particular situation I don't think the "Persistence Of The Value Premium"
is going away any time soon. I think their are lot's of people like me... maybe
a bit different situation but the same thinking none the less. Just my opinion.

grap0013 wrote:
You cannot except SCV to outperform every 5 year period. That's not the intention of the strategy. More so, you get solid returns with the Larry Portfolio 30:70 with some serious left tail hedging. Over longer time periods I do expect a 30:70 tilted to get similar returns of a higher equity strategy that only has beta: https://www.portfoliovisualizer.com/bac ... alBond3=60

What performance should one expect by having 70% in bonds during the great bond run of the past 30 years (which covers both your links).

I don't think anyone should assume that bonds will do as well over the next 30 years as they have the past 30.

I don't expect a 30:70 to necessarily perform the same as one with more equities. I don't care to predict how small value will do, but I am reasonably sure that bonds will not have a repeat performance.

I would never base by portfolio on backtesting of this strategy. If you are comfortable with potentially lower returns for more safety then sure. SCV would really have to deliver a wow of a premium to make up for what is most likely muted returns from 70% of your portfolio (perhaps just a little over inflation). I wouldn't want to make that bet unless I were already financially quite secure.

grap0013 you know much more about bonds than I, don't you? Am I honestly wrong here?

grap0013 wrote:
You cannot except SCV to outperform every 5 year period. That's not the intention of the strategy. More so, you get solid returns with the Larry Portfolio 30:70 with some serious left tail hedging. Over longer time periods I do expect a 30:70 tilted to get similar returns of a higher equity strategy that only has beta: https://www.portfoliovisualizer.com/bac ... alBond3=60

What performance should one expect by having 70% in bonds during the great bond run of the past 30 years (which covers both your links).

I don't think anyone should assume that bonds will do as well over the next 30 years as they have the past 30.

I don't expect a 30:70 to necessarily perform the same as one with more equities. I don't care to predict how small value will do, but I am reasonably sure that bonds will not have a repeat performance.

I would never base by portfolio on backtesting of this strategy. If you are comfortable with potentially lower returns for more safety then sure. SCV would really have to deliver a wow of a premium to make up for what is most likely muted returns from 70% of your portfolio (perhaps just a little over inflation). I wouldn't want to make that bet unless I were already financially quite secure.

grap0013 you know much more about bonds than I, don't you? Am I honestly wrong here?

I stated I was cherry picking dates intentionally to illustrate a point about packer16's cherry picked dates.

I would not personally do low high tilted equity and 70% treasury bonds. Probably in retirement I'll do it though. I do like the equity mix a lot however. Even if value has no premium going forward there is still a diversification benefit. Its historical correlation to beta has been ~0. Hence, one should get smoother returns by incorporating a value tilt.

Plus value tilting is inherently "anti-bubble" investing which is smoother by itself. As tech grows in the S&P 500 do you want to include more and more of it as price increases while earnings remain constant? I don't think so. Same goes for emerging markets. Do you want to keep adding more and more Chinese stocks as they rise to very high valuations? I'll stay out of that bubble thank you very much by employing a value tilt across the board.

privatefarmer wrote:
I think "factor crowding" and just the fact that the big boys (ie institutional investors, hedge funds) aren't going to let any factor "premium" exist for public consumption explains why these factors have not been obtainable for the common investor. DFA came about in the early 90s, great timing, they've had great results, however if you go back just a few years farther you can see that there hasn't been any premium... Now if you go back even farther to 1928 then the data is strong HOWEVER there weren't small cap index funds before 1987 and certainly the factor premiums were not widely known.

I have come to the conclusion that if the average investor thinks he/she can simply invest in VBR instead of VTI and make more money, he/she is likely to be disappointed. It simply cannot be that easy.

Emphasis mine.

I think this is absolutely true. Factor advocates have advertised up to a 2% premium over TSM for SCV. It may well have been true in the past, and DFA did extremely well in the early/mid 2000s, but there is so much institutional money chasing every basis point that I cannot honestly believe that such a mispricing could continue indefinitely.

My dates were not cherry picked. They happened after the Larry's article was published and updated recently to show the same results. Also the point was to include a time period where SCV funds were getting more & more AUM which at some point (maybe it already has) will effect future returns. In looking at longer periods of time you are including times when SCV was less known & had less AUM versus the current time when that is not the case.

packer16 wrote:My dates were not cherry picked. They happened after the Larry's article was published and updated recently to show the same results. Also the point was to include a time period where SCV funds were getting more & more AUM which at some point (maybe it already has) will effect future returns. In looking at longer periods of time you are including times when SCV was less known & had less AUM versus the current time when that is not the case.

Packer

A 5 year window? Not cherry picked? C'mon. You cannot draw any meaningful conclusions about premiums and 5 year time span. At least put a disclosure on there. We've shown a million times on this website that factors often have draughts up to 15 years and that includes beta. When there is no value premium from 2012 to 2027 let me know and I'll eat my hat. If Vanguard changes their underlying indexes 3 times in the interim we will have to note that as well.

grap0013 wrote:
Same goes for value vs. TSM. TSM may outperform over 15 years but if it does it likely won't be by much. Hence, you will not lose the farm with a full value strategy. The chances of good value strategies of outperforming by a percentage point or two are much greater IMO.

That was my line of thinking with a low double digit percentage of my domestic stock holdings put in DES (WisdomTree SmallCap Dividend Fund (ETF)). Of course another part of it was I like the dividends and thinking possibly I can take the dividends, which are around 1% more than the S&P 500, and still have the NAV of the fund grow around what the S&P 500 NAV might grow if not reinvesting its 1% lower dividend yeild

snarlyjack wrote:
After much research the Vanguard High Dividend Index Fund compares very
favorably with the TSM & S & P 500 funds. I specifically target dividends (if needed)
& growth/safety of the fund. Big Blue Chip stocks (in my case) work out perfectly.
It just happens to be a "value tilt" to large companies/blue chips that pay dividends.

Another thing I like about VYM (Vanguard High Dividend Yield ETF) is that its market cap weighting actually has a tiny portion of it holding those small value stocks that so many favor around here. I'm thinking it will still catch a tiny benefit from them on their way up: http://www.etfresearchcenter.com/tools/ ... VYM&f2=vbr

MindtheGAAP,
I believe in both the small and value premia. But if you have to choose one over the other, I believe the value premium is more certain. Seems more people are convinced value is real while some question small. Part of the problem is in definitions: value is bottom 1/3 by BtM while small is only smallest 1/2 by size. Think the premiums are most obvious when divide value and size into deciles. Also, I think the value premium biggest in small stocks.

MindtheGAAP,
I believe in both the small and value premia. But if you have to choose one over the other, I believe the value premium is more certain. Seems more people are convinced value is real while some question small. Part of the problem is in definitions: value is bottom 1/3 by BtM while small is only smallest 1/2 by size. Think the premiums are most obvious when divide value and size into deciles. Also, I think the value premium biggest in small stocks.

packer16 wrote:My dates were not cherry picked. They happened after the Larry's article was published and updated recently to show the same results. Also the point was to include a time period where SCV funds were getting more & more AUM which at some point (maybe it already has) will effect future returns. In looking at longer periods of time you are including times when SCV was less known & had less AUM versus the current time when that is not the case.

Packer

A 5 year window? Not cherry picked? C'mon. You cannot draw any meaningful conclusions about premiums and 5 year time span. At least put a disclosure on there. We've shown a million times on this website that factors often have draughts up to 15 years and that includes beta. When there is no value premium from 2012 to 2027 let me know and I'll eat my hat. If Vanguard changes their underlying indexes 3 times in the interim we will have to note that as well.

I was trying to measure the premium after it already has alot of AUM behind it. There is no other similar period. The argument is alot of folks do the same thing, buy stocks with SCV characteristics, the future expected returns will be lower or even negative due to inflows. The irrelevance of the other periods is due to having a small amount of AUM versus the SC universe. What may happen here may be similar to portfolio insurance as what can be dome on a small scale may not be able to be done on a large scale.

packer16 wrote:My dates were not cherry picked. They happened after the Larry's article was published and updated recently to show the same results. Also the point was to include a time period where SCV funds were getting more & more AUM which at some point (maybe it already has) will effect future returns. In looking at longer periods of time you are including times when SCV was less known & had less AUM versus the current time when that is not the case.

Packer

A 5 year window? Not cherry picked? C'mon. You cannot draw any meaningful conclusions about premiums and 5 year time span. At least put a disclosure on there. We've shown a million times on this website that factors often have draughts up to 15 years and that includes beta. When there is no value premium from 2012 to 2027 let me know and I'll eat my hat. If Vanguard changes their underlying indexes 3 times in the interim we will have to note that as well.

I was trying to measure the premium after it already has alot of AUM behind it. There is no other similar period. The argument is alot of folks do the same thing, buy stocks with SCV characteristics, the future expected returns will be lower or even negative due to inflows. The irrelevance of the other periods is due to having a small amount of AUM versus the SC universe. What may happen here may be similar to portfolio insurance as what can be dome on a small scale may not be able to be done on a large scale.

Packer

On what basis do you say SCV has a higher AUM than in the past.

My understanding is that the value-growth spread now is high -- reflecting SCVs underperformance. No time to look for numbers now though, but generally value doesn't appear to be overgrazed AFAIK. Someone correct me if wrong please.

If you look at Vanguard as a proxy for the SCV (I think is orders of magnitude larger because Vanguard is one player amongst many in this area), AUM increased from $7.9b in 2012 to $24.5b in 2016 over a 3x increase in AUM. IMO the spread between growth & value can be misleading because value companies are suppose to be cheaper than growth due their slower growth rates & higher debt levels. SCV value has outperformed due to the overreaction of expectations versus subsequent performance. With this new flow of money into these stocks, the overreaction has been reduced or maybe even reversed. We will not know until we observe subsequent performance. If SCV continues to underperform, then the answer is the flood of money into this segment has more than compensated for the overreaction. If it outperforms, then there is more room in the segment of the market for AUM.

packer16 wrote:If you look at Vanguard as a proxy for the SCV (I think is orders of magnitude larger because Vanguard is one player amongst many in this area), AUM increased from $7.9b in 2012 to $24.5b in 2016 over a 3x increase in AUM. IMO the spread between growth & value can be misleading because value companies are suppose to be cheaper than growth due their slower growth rates & higher debt levels. SCV value has outperformed due to the overreaction of expectations versus subsequent performance. With this new flow of money into these stocks, the overreaction has been reduced or maybe even reversed. We will not know until we observe subsequent performance. If SCV continues to underperform, then the answer is the flood of money into this segment has more than compensated for the overreaction. If it outperforms, then there is more room in the segment of the market for AUM.

Packer

It's not a good measure. TSM had inflows at Vanguard in recent years too. Even total international probably had large inflows at Vanguard.

The key here is the inflow is significantly higher than the actual returns so you have an increased weighting in these stocks versus the average. Do you have a better metric to measure the effects of increased investment on these stocks? I think this is an issue as with other "crowding" trades & measurement can be challenging. There is also John Bogle's wisdom about this which is also important.

packer16 wrote:The key here is the inflow is significantly higher than the actual returns so you have an increased weighting in these stocks versus the average. Do you have a better metric to measure the effects of increased investment on these stocks? I think this is an issue as with other "crowding" trades & measurement can be challenging. There is also John Bogle's wisdom about this which is also important.

Packer

Inflows to Vanguard measure nothing but inflows to Vanguard. All investments have probably seen higher inflows to Vanguard than actual their returns too. It's because money is pouring into all Vanguard funds.

Search for "value growth spread" -- it's measurable.

Typically when valuation spreads are this wide, there are strong returns for value stocks looking 3 & 5 years out.